Why FY18 looks like it's going to be a good year for the auto industry

The overall growth of this sector is close to 7 percent across all segments and certain specific segments have shown a much better growth.

Sridhar V

The auto sector wanted to race to 12-15 percent growth in FY 2016-17 and there was every indication of that being possible until October 2016, despite some odd setbacks. But the surge was curtailed, albeit temporarily, on account of demonetisation announced on November 8. Now, we are seemingly back on track for much better days. The overall growth of this sector is close to 7 percent across all segments and certain specific segments have shown a much better growth.

The auto sector crossed 3 million passenger car sales during the past year against a few hurdles like the Supreme Court ban on diesel vehicles above 2 litres in Delhi and Kerala coming up with a similar ban.

Demonetisation did not deter this segment, which has shown a respectable growth after a temporary hiccup. March 2017 posted an all-time high over the last two years of close to 282, 519 passenger vehicle sales. The strong growth was possible because of a more than significant contribution of 30 percent by SUVs. With a series of new introductions planned in the current year, the momentum for passenger cars is expected to be healthy.

related news

The two-wheeler segment reported a volume of 17.6 million units. The second half of FY 2016-17 was a real dampener, suffering a significant impact due to demonetisation (-3.4%). However, the sales for March 2017 showed a marginal increase over March 2016, exhibiting an increasing trend in terms of March 2017 sales over February 2017. Most of this came on the back of a turnaround post demonetisation and heavy discounts on account of unlocking the BS III inventory pile in March 2017.

While these numbers are yet to reach the September-October 2016 monthly high of close to 1.8 million units, which is the best over the last 24 months, one can really see a reversal of the negative trend since November 2016. This segment can be expected to breach 20 million units in the next financial year.

Commercial vehicles had a lukewarm growth of 4.4 percent year-on-year despite a promising first half growth of 7 percent. March 2017 sales were again at a 24-month high and were also supported by incremental demand arising out of the new fuel standard extended to throughout the country.

LCVs in comparison to MCVs have shown better traction in FY 16-17 with volume of MCVs remaining at the 302,000 mark. Overall growth for LCVs is strong at 12 percent indicating a good uptick in the economy.

Towards the end of the financial year, the ban on registration of vehicles not complying with BS IV standards was a setback for a few players but this situation is best handled by the Original Equipment Manufacturers specifically the two and three- wheeler segment and commercial vehicle segments, which they are confident of going by their own statements.

This episode is a learning for the April 2020 BS VI transition, which all the OEM needs to plan effectively for in order for a no-surprise situation. In a country where postponements and delays have been an expectation, one can no longer afford to be complacent when the signal emanating from the authority is firm and steady.

All things being equal, the sector can look at gaining speed and coursing through in FY18. GST, Infrastructure growth (pace of laying quality roads have increased to 22.5-km per day helping complete 8,231-km of national highway) and the amended Motor Vehicles Act should only help that cause.

The writer is Partner at Grant Thornton India LLP and the views expressed are personal.